Wages up for the well-off, but not for others

Most US workers saw their earnings fall or stagnate last year, with those at the bottom of the income scale hit hardest.

The trend, coming alongside a slack job market, explains why many Americans feel left out of the economic recovery - and why President Bush faces a tough sell with his campaign-trail message that there is "good strong growth." Democratic rivals point to "two Americas," one for the rich, one for the poor.

Whether concerns over widening wage inequality will damage Mr. Bush remains to be seen. But the gap between workers in the 90th earning percentile and the 10th has never been wider. That opens the door for a populist message by a Democratic challenger to resonate, if job creation doesn't pick up.

Beyond the election, the stalling progress for the bottom half of American workers represents a challenge to the health of an economy traditionally driven by a growing consumer class.

The problem of widening wage inequality is not new, and is rooted in long-term trends. The rise of technology in the workplace, for example, puts a premium on educated workers and eats into the bargaining power of the less-skilled. The entry of about a million immigrants a year, puts downward pressure on wages in many low-income jobs. Offshore outsourcing of jobs and falling union representation also play a role.

"All these factors are still present," says Ann Owen, an economist at Hamilton College in Clinton, N.Y. and former Federal Reserve economist in Washington. "We can probably project a future growth in inequality."

Particularly troubling: The challenge persists even as the economy is growing, at a 8.2 percent annual rate in the third quarter of 2003 and a 4 percent rate in the fourth quarter.

The median weekly wage for the nation's 100 million workers was $625 in the fourth quarter last year. That's up 2 percent from the same quarter in 2002, barely beating inflation.

A recent study by the Economic Policy Institute, a liberal-leaning think tank, finds that in 2003, earnings fell 0.1 percent for workers in the very middle of American wage scale (the 50th percentile.) Wages fell even more, 1.2 percent, for full-time workers at the lower end (the 10th percentile). For the 90th percentile, the change in after-inflation earnings was upward: a 1.1 percent rise.

The trend of widening wage gaps has been continuing, with few interruptions, since at least 1979. Today a worker at the 90th percentile earns $1,419 per week, 4.7 times as much as a worker at the 10th percentile in America's wage spectrum. In 1979, it was 3.7 times as much.

In the 1950s and 1960s, by contrast, the wage gap shrank or held steady, economists say. "One of the keys to economic success after World War II was the vast middle class which bought most of the goods and services produced by our economic machine," says Robert Reich, secretary of labor under President Clinton. "If the middle class hollows out, we could be in trouble. The rich tend not to spend most of their earnings."

They invest surplus earnings, not only in the US, but around the world. That portion invested abroad in search of higher earnings does not immediately boost the US economy.

The result could be a slower economy. "We don't face the problem yet, but it is something to keep an eye on," says Mr. Reich, an economist at Brandeis University in Waltham, Mass.

American living standards have generally continued to rise, but often families have achieved that by bringing in two incomes rather than one.

And shifts in the job landscape, away from manufacturing and toward the service sector, make it hard for some workers to keep up. "The driver of real wage growth is productivity," says David Huether, an economist with the National Association of Manufacturers in Washington. That's why manufacturing and mining pay relatively well, while jobs in retailing, restaurants, and some other services generally pay poorly. He says manufacturing employment will pick up "in the next few months."

But Jared Bernstein, an economist at the Economic Policy Institute in Washington, says it will take some time before wages start rising substantially again.

If the unemployment rate were to drop again below 5 percent and the labor market tighten up considerably, wages for lower and modest income workers could start climbing again. "Employers then have to lift wages up to get the workers they need," Mr. Bernstein says.

Most economists don't see a tight labor market before 2005 at the earliest.

It's not clear whether the pickup in employment will come quickly enough to boost the reelection hopes of President Bush.

Typically, voters in November judge the economy by how they felt in the spring, political analysts suggest.

With job growth lagging behind expectations, that may explain why Democratic presidential hopefuls are pounding the wage-gap theme so hard. Sen. John Edwards of North Carolina speaks of "two Americas," while the leading contender, John Kerry, promises "a prosperity where we will reduce the poverty of millions instead of constantly reducing taxes for millionaires."

Such appeals often haven't worked. Wall Street economist Lawrence Kudlow calls such talk "class-warfare speak."

But perhaps it could in a nation where the hottest Christmas sales this past season were at luxury stores like Tiffany.